It’s getting more expensive or impossible to get fire insurance in California these days, so more people there are turning to the FAIR Plan, which is a government-backed insurer’s last option. However, flames in Los Angeles have destroyed thousands of homes worth tens of billions of dollars. This has made some people worry that FAIR’s funds will run out, leaving all California policyholders to make up the difference.
A non-profit group called Consumer Watchdog has previously raised concerns about FAIR’s financial stability. Last year, they said that California homeowners might have to pay an extra $1,000 to $3,700, or even more if there was a big fire. FAIR can ask private insurance companies to cover more costs under the idea. Those companies would then pass those costs on to customers.
The big event that the group was afraid of has now happened. That amount is “in the ballpark of what we would all pay,” according to the group’s president, Jamie Court. What happens will depend on how much damage was done and how much money the FAIR Plan has right now.
Consumer Watchdog’s estimates are based on some very bad numbers. The FAIR Plan is in bad shape because so many of its policyholders are in areas that have been affected. For example, the coastal town of Pacific Palisades, which has been destroyed by fire, is responsible for about $6 billion in losses, and other evacuation areas are responsible for billions more. It only has about $200 million in cash on hand, but it can get another $2.5 billion from reinsurance companies, which help insurance companies out when things go wrong. As other private insurers have either stopped renewing policies or raised prices across the state, more and more homes have turned to FAIR.
Victoria Roach, head of the FAIR Plan, told the California state legislature last year, “We are one event away from a large assessment.” “There’s no other way to say it, because we don’t have the money on hand [to pay all the claims] and we have a lot of exposure.”
Fortune asked the FAIR Plan on Saturday if California homeowners might have to pay extra fees in the future. A spokesperson said, “The FAIR Plan cannot speculate about the future impact of this disaster on California policyholders.”
A spokesperson for The FAIR Plan told Fortune, “The FAIR Plan, which is mainly a catastrophe insurer, is ready and actively serving customers who have already made claims.” “The FAIR Plan has payment mechanisms in place, including reinsurance, to ensure all covered claims are paid.”
Another problem is that many people don’t know how the fires started. It is being looked into by police in Altadena whether an electricity transmission tower could have been the cause of the Eaton fire. The state has a utility wildfire insurance fund that could pay out about $15 billion if a power company is found to be at fault.
Frank Manchester, chief global insurance advisor at SAS, says, “I don’t think anyone looks at the California insurance market and says it’s a healthy and functioning market.” “I think that the FAIR Plan has its limitations, but it is necessary.”
The rates will go up.
That’s not all bad news for people with insurance in California; their rates may also go up for other reasons. Insurance Commissioner Ricardo Lara of California just put out a rule that lets customers pay for reinsurance costs with their rates. The rule goes into effect at the end of this month. In exchange, private insurers should bring their coverage to more high-risk places.
According to Consumer Watchdog, this could cause home insurance rates to go up by as much as 40% to 50%. Fortune asked the California Department of Insurance for a word, but they didn’t come back.
Without question, many experts believe that the fires are a major turning point for California’s insurance market. It will take at least a few weeks to fully understand how bad the fires were.
It caught fire last week at Olga Sajkowski’s home in Malibu. After being dropped by their private insurance, USAA, a year ago, she and her husband looked for coverage through the FAIR Plan. She is worried about how the insurance company will pay out, but she is also hoping for the best.
“Do I trust that the California FAIR Plan will be able to pay its bills?” “No, but it’s all we have right now,” Fortune said at the time. “Our livelihood, our net worth, is wrapped up in that house.”
Customers who have been touched by the FAIR Plan are being asked to file their claims online. If they are having trouble, they can also call 800-339-4099.
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